When Allegations Of Fraud Is An Arbitrable Matter: Recent Court Of Appeal Decision In Charles Mukwenye V. Lotus Capital Limited & Ors

INTRODUCTION Arbitration clauses in modern times have become standard clauses for business contracts seeking faster settlement of disputes between Parties.  It is however elementary to understanding of arbitration that not every matter is arbitrable. In other words, in certain instances an arbitration clause in a contract would not operate to oust the jurisdiction of the courts even when matters have not first been referred to arbitration as required by such clauses. One of the established matters which is not arbitrable is a matter which amounts to a crime or allegation of fraud. The exact ambit of the above proposition of law, came under the scrutiny of the Court of Appeal in Appeal No: CA/L/1349/2016-Charles Mukwenye v. Lotus Capital Limited & Ors decided on 20^th April 2018. This article reviews the decision of the appellate court, in the light of the authority it establishes on the above issue of law. Brief Statement of Facts The appeal was bought against the Ruling of the Federal High Court, Lagos delivered by Justice Olatoregun J. on the 18^th of October, 2015 in Suit No: FHC/CS/354/2015. The Appellant as Plaintiff in the Federal High Court, Lagos commenced, via a Writ of Summons, an action against the 1^st Respondent and 4 others. In response, the 1^st Respondent filed a Motion on Notice seeking to stay proceedings pending reference to and determination of the dispute by arbitration, as contained in the Agreement of the parties. The Federal High Court heard the applications and delivered its Ruling in favor of the Respondents, to the effect that the Appellant’s suit cannot be heard until reference has been made to arbitration and same has been exhausted as contained in the Agreement as that was a condition precedent to the court’s exercise of jurisdiction. Dissatisfied with the lower Court’s decision the Appellant appealed and formulated the following issues, amongst others:

1. Whether the trial Court breached the fair hearing right of the Appellant by its failure and/or refusal to consider all the Issues brought before it for adjudication as contained in the processes filed by the Appellant.
2. Whether the trial Court’s failure to appreciate that in the circumstances of this instant case with so much bearing on the several issues therein that it is impracticable to resolve these issues by arbitration, the said issues having not been within the Appellant and the 1^st and 2^nd Respondents pursuant to Clause 9.3 of the Telecoms Private Equity Investment Agreement of May 21, 2008?

ISSUE ONE On the first issue, the Appellant submitted that it is the duty of the trial Courts to pronounce on all issues raised or brought the court by the parties and not to restrict themselves to one or more issues which in their opinion disposes of the case.  Counsel argued that parties submitted several issues for determination before the lower Court but that the lower Court refused and/or failed and/or neglected to rule on issues joined between the Appellant and the 2^nd ,  3^rd , 4^th  & 5^th Respondents, and only chose to determine the issues joined between the Appellant and the 1^st Respondent. In response, learned counsel for the 1^st Respondent referred  to S.C.E.N. vs. Nwosu [2008] All FWLR (Pt. 413) Pg. 1399 to contend that the lower Court gave opportunity to all the parties to be heard on all the issues raised by all the Respondents and came to the  conclusion that its jurisdiction to proceed with the matter was yet to be activated because of the failure of the Appellant to exhaust the dispute resolution mechanism agreed in the contract prior to the commencement of the suit. Learned counsel relied an EGHAREVBA vs. FRN (2016) LPELR-40045 (SC) to argue that as an exception to the general rule, a Court needs not pronounce on issues where the pronouncement would negate the adjudicatory process or prejudice the process or pervert the cause of justice of the matter. RESOLUTION On the above issue, the Court held: …It is apparent that the learned trial judge adopted the approach of picking out the “most crucial” issue relating to the jurisdiction of the lower court, which has been raised by the respective parties before it….This approach is seemingly in conflict with the settled position of the law that a court must consider and pronounce upon every issue properly placed before it for consideration and determination. I must be quick to add that the foregoing position permits certain recognized exception…in UDO vs. EKPO & ANOR (2016) LPELR — 41383 (CA), this Court held “The general rule which is now settled is that a Court, be it first or appellate, has a duty to consider all the issues pleaded before it. Howbeit, where it is of the view that a consideration of one issue is enough to dispose of the matter, the said Court is not under any obligation to consider all the issues posed by the parties. …Even though a Court is bound to consider all the issues properly before it, the failure to do so is not necessarily fatal to the judgment since the failure to do so had not occasioned a miscarriage of justice. See. BAMAIYI vs. STATE & ORS (2001) LPELR – 731 (SC)…There is nothing on record before us, particularly as it relates to the failure the lower court to pronounce on all the issues joined by the parties, showing that the failure has occasioned a miscarriage of justice. It is obviously of no relevance, considering the peculiar situation in the instant Case, to expect the lower court to pronounce on other issues, when it had already held the view that it does not have any jurisdiction to entertain the matter. ISSUE TWO On the second issue the Appellant referred to IGNES AERIENNES CONGOIAISES vs- AIR ATLANTIC NIGERIA LIMITED [2006] 2 NWLR (Pt. 963) Pg. 49; OBEMBE vs. WEMABO ESTATE [1977] 5 SC 15 at 131 and KS.U.D. B vs. FANZ LTD [1986] 5 NWLR (Pt. 39) 74 at 86-87, Paras. C — D to submit that an arbitration clause does not oust the jurisdiction of the Court or prevent parties from having recourse to the Court. Learned Counsel further submitted that fraud was pleaded with the particulars in the case and therefore, it cannot be within the contemplation of the Arbitration agreement. Counsel cited J. EXPORT& CHEMICAL COMPANY LTD Vs. RADUNA REFINING a PETRO-CHEMICAL COMPANY LTD (2002) LPELR-12175 (CA). In response, the Respondent submitted that the Appellant did not deny the Agreement and the fact that parties agreed to be bound by arbitration. The Respondent’s counsel submitted that the use of the word fraud in the context of this case does not refer to any criminal offence and that a civil claim does not automatically transform into criminal proceedings incapable of being resolved by arbitration merely because a party made an allegation of fraud, whether rightly or wrongly. Counsel placed reliance in the case of A. AYYASAMY Vs. A PARAMASIVAM & ORS (CA NOS. 8245-8246 OF 2016) decided by the Supreme Court of India where it was held that allegations of fraud are no impediments for arbitration proceedings unless the allegation is very serious in nature or in relation to the arbitration agreement itself. The Appellant in reply argued that fraud is fraud whether in civil or criminal proceeding if it is pleaded, and particulars of the said fraud are furnished as done in the instant Case. RESOLUTION The Court in resolving this issue held: It is undisputed that before a matter can be referred to arbitration, same   must first be seen to be arbitrable. The dispute must not relate or cover matter which by law, are not permitted to be settled by other dispute resolution mechanisms other than in court. The Arbitration and Conciliation Act Cap A18, does not demarcate between disputes that are arbitrable or otherwise, it has however been judicially recognized as a matter of public policy that matters relating to crime, matrimonial causes, winding up of a company or bankruptcy are of such nature that cannot be settled by arbitration. See; BCC TROPICAL (NIG) LTD vs. GOVERNMENT OF YOBE STATE OF NIGERIA & ANOR (2011) LPELR — 9230 (CA). As the argument of counsel in this appeal shows, arbitrability of fraud is one of the contentious issues in arbitration, particularly as it involves questions of what type of issue can and cannot be submitted to arbitration. It has always been the case that where fraud and serious malpractices are alleged in a dispute, same cannot be referred to an arbitrator for resolution. The jurisdiction of the regular court on this issue is iron-clad, as fraud, financial malpractice and collusion are allegations with criminal consequences and therefore reserved for the Courts, and an arbitral tribunal, being creature of contract, is not endowed with general and wide jurisdiction, bestowed upon regular courts which are equipped to adjudicate in complex issues and are competent to offer wider range of reliefs to   the parties in dispute. In the instant appeal, it is undisputed that the Appellant pleaded fraud with the particulars thereof… It is in this regard that the Appellant sought a declaration that the Respondent’s Telecom Private Equity Fund is a Ponzi Scheme used by the 1st Respondent to defraud the Appellant. The Appellant holds the view that the issue of fraud alleged in the instant case cannot be resolved by arbitration. The learned Counsel for the   Respondent contended otherwise that the principal claim of the Appellant is for breach of Agreement and that the use of “fraud” by the Appellant in this case does not refer to any form of criminal offence but is at best contractual misrepresentation. I am not aware of any decision of the Superior Courts in this country where the instant issue was considered and pronounced upon. I therefore take solace in decisions in other jurisdictions, which though are of persuasive authority, are nevertheless applicable to the issues herein. See the decisions in SWISS TIMING LTD vs. ORGANISING COMMITTEE, COMMON WEALTH GAMES 2010 (2014) 6 SCC 677; WORLD SPORT GROUP (MAURITIUS) LTD vs. MSM SATELLITE (SINGAPORE) PTE LTD in Civil Appeal No- 895 of 2024. In WORLD SPORT GROUP (MAURITIUS) LTD (Supra), …the Respondents alleged that the Appellant had fraudulently siphoned off [monies]. The Appellant sought reference of the dispute to arbitration under Indian Arbitration Act. The High Court rejected the Appellant’s application on the ground that the dispute involved allegations of fraud. Aggrieved by the decision, the Appellant preferred an appeal before the Supreme Court. It was the contention of the Respondents in that case just as the one before this court that, where allegations of fraud are involved civil courts are the appropriate forum for adjudication. The Supreme Court of India rejected the general notion that elements of criminal wrongdoing detracted from the jurisdiction of arbitral tribunal. Referring to the Indian Arbitration Legislation and the New York Convention, the Court considered that the allegations of fraud did not impact on the validity of the arbitration agreement; the fact that fraud was alleged did not render the agreement inoperative or incapable of being performed. The foregoing decisions of the Indian Supreme Court are instructive, and I must say the reasoning therein is compelling. It is my view, that to accept the Appellant’s contention to the effect that arbitration should be shut out merely on the basis of allegation of fraud, which has not been subject to proof, would undoubtedly destroy the very purpose for which the parties had agreed by contract to submit to arbitration. In as much as the allegation of fraud does not relate to the validity of the substantive contract, which is even separable from the Arbitration clause, I am of the opinion that the court ought to act with caution and circumspection as the allegations of fraud in the circumstances of this case, can be duly considered by an Arbitrator or Arbitral Tribunal. …I am therefore unable to accept the submissions of learned Counsel for the Appellant that mere allegation of fraud renders the dispute herein un-arbitrable. …the reasoning expressed in decision of this court in B-J. EXPORT & CHEMICAL COMPANY LTD cannot be adapted here, where the allegation of fraud is in relation to the performance of obligations under the contract. In that case, the allegation of fraud affects the contract, or at best, the arbitration agreement and goes to the root of the relationship between the parties. The position of the law stated by this court in the said case remains potent but qualified to the effect that only the court can adjudicate on allegation of fraud which affects the validity of an arbitration agreement, In all. Having heard and decided all issues raised by Parties, the Court found against the Appellant and dismissed the appeal. CONCLUSION The Court of Appeal decision in Charles Mukwenye v. Lotus Capital Limited & Ors founds authority on the conditions for arbitration of allegations of fraud. It is incisive to point out that other issues of law are addressed in the suit which, for brevity, have not been herein discussed. While the decision of the appellate court is indeed commendable and is authority until overruled, it is may be difficult sometimes to understand the distinction created by the Court between a matter of allegation of fraud which affects the contract and thus affecting the validity of the Contract, and a matter of fraud which affects the performance of obligations in the contract and not its validity. Simply however, what the Court of Appeal has established is that where the fraud would not render the entire Contract invalid, then the fraud complained of would be arbitrable. The essence is that a valid contract creates a valid clause for arbitration contained in the Contract, and where the contract is invalid, so is the arbitration clause it contains. In essence, the question of validity of a contract cannot be determined by arbitration which is mandated by arbitration clause under the same contract whose validity is under question due to the allegation of fraud. In such instance, only a competent civil court would be empowered to resolve the dispute. Oliver Omoredia writes For TheNigerialawyer Click here to download the  Judgement in PDF format]]>